Fine print should protect lessee

A natural gas well could be productive for a few months to up to 20 or 30 years.

Before signing a lease with a gas company, property owners should prepare for a long partnership with a gas company.

Landowners can find common ground in the negotiated addenda, or additions, to the standard natural gas lease.

Working for landowners, Williamsport attorney Lester Greevy has negotiated dozens of different types of addenda, depending upon clients’ concerns and needs.

In his presentations to landowners, Mr. Greevy calls attention to the red flags in some leases and key addenda for landowners to consider.

Not all addenda are essential for every lease. Mr. Greevy tells landowners to pursue only the addenda that are important to them or unique to their site, as loading up on addenda can reduce the value of the lease to the gas company.

“I know people with 200 acres who know every tree and stream,” said forester Ken Ballient, of Penn State Cooperative Extension’s Natural Gas Leasing team. “Property owners cannot view this as being just about the dollars — they have to consider the goals for their land.”

Here are some issues property owners should consider before signing a lease:

n Natural gas only: Some leases give the company the right to any minerals on the property, including sulphur or soil. The lease should be limited to natural gas only.

n Pipeline and storage: Many first-draft leases give the company the right to store or pipe gas from other sites.

“You don’t want a pipeline on your property that serves someone else’s well unless you are going to be paid,” Mr. Greevy said, adding that the same goes for storage. Also, companies should be required to run the pipelines below plow depth using the “double ditch” method, he said.

n Location fee: Several lots may be declared in a “unit” from where natural gas is drawn, but the well will go on just one property. That property owner should be entitled to a fee for hosting the drilling operation. These have conventionally been $15,000, Mr. Greevy said.

n Shut-in royalty: If a company finds gas, but lets it sit there for lack of a pipeline or some other reason, property owners could be given a shut-in royalty for prolonged delays in extracting the gas. It is usually a fee per acre.

n Domestic gas use: Several leases give property owners the right to use the natural gas for their homes. That may sound good, but Mr. Greevy said the homeowner typically has to pay for the pipeline, decompressor and other equipment to get the gas. Add that to costs of mechanical conversions inside the home, and it’s hardly worth it.

Mr. Greevy suggests that landowners seek a one-time payment in lieu of gas, which is typically about $2,000. They can also see if the company agrees to provide the needed equipment to use the gas.

n Timber sales: If the company has to remove trees to build the 4- to 5-acre drilling pad, the lease could require it to stack the timber for use or sale by the landowner. An appraisal of the timber could be requested and the property owner compensated for the removal.

n Water quality protection: A major concern for property owners with wells is water quality. That can be protected in the lease by requiring a water test before construction of the drill pad. If future water tests show degradation of quality, the company would have to address it.

n Road rights: Companies will have to make temporary roads to their wells. Lessees can ask the company to build roads with minimal impact on farmland or their homes. The road could be gated, as well.

“There will be spectators,” Mr. Greevy warned.

n Land restoration: The state Department of Environmental Protection, which regulates drilling, requires land restoration at the end of a well’s productive life. But the specifics of the restoration plan won’t be devised until the company applies to the state to drill. For that reason, the lease could require specifics concerning reforestation, food plots for game animals or filling to the land’s predrilling slope.

“If there are special features about the property and you want those restored, the DEP may or may not require them,” said DEP spokesman Mark Carmon. “If something is of value to the property owner, they should work it into the lease.”

n Indemnity: Property owners should be held harmless from any claims resulting from drilling activity and should be named as an insured on the gas company’s policy.

n Production and royalty audits: Lessees should be entitled to audits of a well’s production to show that royalty payments are accurate. Mr. Greevy expects local accountants will soon become adept at the subspecialty known as mineral management accounting to provide this service.

n Arbitration, not litigation: Lease terms should require parties go to arbitration to settle disputes that pop up during a lease term. Not only is settling disputes in court costly and time consuming, but the judicial system in the region is ill-prepared to settle mineral rights issues, Mr. Greevy said. In arbitration, both parties elect a representative who tries to negotiate a resolution. If they don’t, both agree on a third arbitrator to settle the dispute. Arbitration is quick, easy and fair, Mr. Greevy said.

n Clean & Green program: Property owners in several rural counties may take advantage of the Clean & Green tax break. While it’s unclear whether gas drilling will result in a retroactive forfeit of the tax benefit, an addendum to the lease should require the company to compensate property owners for the tax penalty.

n Water rights: Leases often give the company unlimited access to water on the site. Property owners may want to restrict that based on their own water needs.

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